FORECASTS

Sunday, November 15, 2009

All investment decisions are based on forecasts of the future. No investor would ever incur stock market losses if he could accurately predict the future. A bull something today with the expectation that it will be more valuable tomorrow. A bear, on the other hand, sells because he thinks the value of what he sells is likely to decline in the future. If both the bull and the bear knew what tomorrow would bring, their chances of going wrong and whether the future is predictable or not is a purely academic question insofar as the stock market investor is concerned. He really has no option but to try and predict it, otherwise he would not be able to function at all.

The finance minister frequently makes major policy announcements based on his forecasts of the economy’s future. A whole group of institutions such as the Planning Commission, National Council of Applied Economic Research, Center for Monitoring the Indian Economy and the Reserve Bank of India periodically publish reports giving future projections on the rate of growth of the GDP, industrial production, inflation and agricultural output. In fact, all our thoughts and actions are based on the underlying premise that the future is predictable. Civilized life, as we know it, would not be possible in the absence of a strongly entrenched belief that events succeed each other according to a pattern that can be discovered and understood.

All forecasting depends upon a sound understanding of reality. In the stock markets, the realities are the pace and direction of economic change, corporate strengths and weaknesses, capabilities of corporate managements, shifting perceptions of investors, potential power struggles, market psychology, impact of technology is devoted to an understanding of these realities.